The World of Videos operates a retail store that rents movie videos. For each of

Question

The World of Videos operates a retail store that rents movie videos. For each of the last 10 years. World of Videos has consistently earned profits exceeding $42,000 per year. The store is located on prime real estate in a college town. World of Videos pays $2,400 per month in rent for its building, but it uses only 50 percent of the square footage rented for video rental purposes. The other portion of rented space is essentially vacant. Noticing that World of Videos only occupies a portion of the building, a real estate agent told the owner of World of Videos that she could add $1,750 per month to her firm's profits by renting out the unused portion of the store. While the prospect of adding an additional $1,750 to World of Videos' bottom line was enticing, the owner was also contemplating using the additional space to rent video games. What is the opportunity cost of using the unused portion of the building for video game rentals?

Explanation / Answer

Opportunity cost of a thing or act is the cost of next best alternative foregone.

In given case, World of Videos can utilize the unused portion either by renting it out for $1,750 per month or $21,000 per year or by using it for video game rentals.

If World of Videos decide to utilize the unused portion for video game rentals then it have to forego the next best alternative that is renting out the unused portion.

As stated above, the cost of next best alternative foregone is the opportunity cost of an act or thing.

So, the opportunity cost of using the unused portion of the building for video games rental is $21,000 (amount earned through next best alternative that is renting out the unused space).

Hence, the correct answer is $21,000.

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